Wal-Mart: Supply Chain

Strategy
Submitted To: Dr. R.K Singh

IIFT-Delhi

Prepared By: Group 11 (Section C)

Kuldeep Mehra (126)

Neha Wankhede (132)
Peter Rajat Sayal (136)
Ravi Shekhar (142)
Background Wal-Mart:

Walton was born in 1918 at Kingfisher, Oklahoma, US. After graduating from the University of
Missouri in 1940, Walton worked for the famous retailer, J C Penney. In his first job, Walton had
displayed the qualities of a good salesman. He realized the importance of building loyalty
among customers as well as employees. In the mid-1940s, Walton gave up his job and decided
to set up his own retail store. He purchased a store franchise from Ben Franklin in Newport,
Arkansas. It was here that he learnt his first lessons in retailing – offering significant discounts
on product prices to expand volumes and increase overall profits. The business was successful
and Walton soon acquired a second store within three years.

Walton not only looked for opportunities to open stores in other small towns but also explored
the possibility of introducing innovative practices such as self-service. As the need for people to
manage his stores increased, Walton tried to attract talented and experienced people from
other stores. By 1969, Walton had established 18 Wal-Mart stores, reporting an annual sale of
$44 million. In mid 1970s, Wal-Mart acquired 16 Mohr-Value stores in Michigan and Illinois. By
the late 1970s, the retail chain had established a pharmacy, an auto service center, and several
jewellery divisions.

In the 1980s, Wal-Mart continued to grow rapidly due to the huge customer demand in small
towns, where most of its stores were located. Commenting on the growth of Wal-Mart, Walton
said: “When we arrived in these small towns offering low prices every day, customer
satisfaction guaranteed, and hours that were realistic for the way people wanted to shop, we
passed right by that old variety store competition, with its 45 percent mark ups, limited
selection and limited hours.” Wal-Mart stores were located at a convenient place in a big
warehouse-type building and targeted customers who bought merchandise in bulk. Customers
could buy goods at wholesale prices by becoming members and paying a nominal membership
fee. By 1984, there were 640 Wal-Mart stores in the US, generating sales of about $4.5 bn and
accruing profit of over $200 mn.

Wal-Mart suffered a setback in 1992, when Walton died after a prolonged illness. But it
continued its impressive growth in the 1990s, focusing more on establishing its stores overseas.
In 1992, Wal-Mart expanded its operations in Mexico by entering into a joint venture with Cifra.
Two years later, the company acquired 122 Woolco stores from Woolworth, Canada. By 1997,
Wal-Mart had become the largest volume discount retailer in Canada and Mexico. In 1997, Wal-
Mart acquired the 21-store German hypermarket chain, Wertkauf. Other international
expansion efforts included the purchase of Brazilian retailer Lojas Americans’ 40 percent
interest in their joint venture, and the acquisition of four stores and additional sites in South
Korea from Korea Makro. In January 1999, Wal-Mart expanded its German operations by
buying 74 stores of the hypermarket chain, Interspar. The stores were acquired from Spar
Handels AG, which owned multiple retail formats and wholesale operations throughout
Germany.
By 2002, Wal-Mart had emerged as the largest company in the world in terms of revenues.
Analysts felt that Wal-Mart had come a long way since 1979, when the company generated
annual revenues of more than a billion dollar for the first time. By 1993, the company was
doing a billion dollar business in a week and by 2001, it was crossing the billion dollar mark in
every 1.5 days. Analysts attributed this phenomenal growth to Wal-Mart’s continued focus on
customer needs and reducing costs through efficient supply chain management practices. The
company was able to offer a vast range of products at the lowest costs in the shortest possible
time. This was possible mainly due to two factors – Wal-Mart’s highly automated distribution
centers, which significantly reduced shipping costs and time, and its computerized inventory
system, which speeded up the checking out time and recording of transactions.

MANAGING THE SUPPLY CHAIN

PROCUREMENT AND DISTRIBUTION

Wal-Mart always emphasized the need to reduce its purchasing costs and offer the best price to
its customers. The company procured goods directly from manufacturers, bypassing all
intermediaries. Wal-Mart was a tough negotiator on prices and finalized a purchase deal only
when it was fully confident that the products being bought were not available elsewhere at a
lower price. According to Claude Harris, one of the earliest employees, “Every buyer has to be
tough. That is the job. I always told the buyers: ‘You are negotiating for your customer. And
your customer deserves the best prices that you can get. Don’t ever feel sorry for a vendor. He
always knows what he can sell, and we want his bottom price. ‘We would tell the vendors,’
don’t leave in any room for a kickback because we don’t do it here. And we don’t want your
advertising program or delivery program. Our truck will pick it up at your warehouse. Now what
is your best price?”

Wal-Mart spent a significant amount of time meeting vendors and understanding their cost
structure. By making the process transparent, the retailer could be certain that the
manufacturers were doing their best to cut down costs. Once satisfied, Wal-Mart believed in
establishing a long term relationship with the vendor. In its attempt to drive hard bargains, Wal-
Mart did not even spare big manufacturers like Procter & Gamble (P&G). However, the
company, generally, preferred local and regional vendors and suppliers.

In 1998, Wal-Mart had over 40 distribution centers located at different geographical locations
in the US. Over 80,000 items were stocked in these centers. Wal-Mart’s own warehouses
directly supplied 85 percent of the inventory, as compared to 50-65 percent for competitors.
According to rough estimates, Wal-Mart was able to provide replenishments within two days
(on an average) against at least five days for competitors. Shipping costs for Wal-Mart worked
out to be roughly 3 percent as against 5 percent for competitors.

Each distribution center was divided into different sections on the basis of the quantity of goods
received and was managed the same way for both cases and palletized goods. The inventory
turnover rate was very high, about once every two weeks for most of the items. Goods meant
for distribution within the US usually arrived in pallets, while imported goods arrived in re-
usable boxes or cases. In some cases, suppliers delivered goods such as automotive and drug
products directly to the stores. About 85% of the goods which were available at the stores
passed through the distribution centers.

The distribution centers ensured a steady and consistent flow of products to support the supply
function. As Wal-Mart used sophisticated barcode technology and hand-held computer
systems, managing the center became easier and more economical. Every employee had an
access to real time information regarding the inventory levels of all the products in the center.
They had to just make two scans – one to identify the pallet, and the other to identify the
location from where the stock had to be picked up. Different barcodes were used to label
different products, shelves and bins in a center. The hand-held computer guided an employee
with regard to the location of a particular product from a particular bin or shelf in the center.
When the computer verified the bin and picked up a product, the employee confirmed whether
it was the right product or not. The quantity of the product required from the center was
entered into the hand-held computer by the employee and then the computer updated the
information on the main server.

The hand-held computer also enabled the packaging department to get accurate information
about the products to be packed. It displayed all information about the storage, packaging and
shipping of a particular product thus, saving time on unnecessary paperwork. It also enabled
the center supervisors to monitor their employees closely enabling them to give directions and
even guide them even on the move. This enabled the company to satisfy customer needs
quickly and improve the level of efficiency of the distribution center management operations.
Each distribution center had facilities for maintaining personal hygiene such as shower bath and
fitness centers. It also had provision for food, sleep and personal business. The distribution
center could also be used for meetings and paperwork. The truck drivers of Wal-Mart
sometimes availed these facilities.

LOGISTICS MANAGEMENT

An important feature of Wal-Mart’s logistics infrastructure was its fast and responsive
transportation system. The distribution centers were serviced by more than 3,500 company
owned trucks. These dedicated truck fleets allowed the company to ship goods from the
distribution centers to the stores within two days and replenish the store shelves twice a week.
The truck fleet was the visible link between the stores and distribution centers. Wal-Mart
believed that it needed drivers who were committed and dedicated to customer service. The
company hired only experienced drivers who had driven more than 300,000 accident-free
miles, with no major traffic violation.

Wal-Mart truck drivers generally moved the merchandise-loaded trailers from Wal-Mart
distribution centers to the retail stores serviced by each distribution center. These retail stores
were considered as customers by the distribution centers. The drivers had to report their hours
of service to a coordinator daily. The coordinator scheduled all dispatches depending on the
available driving time and the estimated time for travel between the distribution centers and
the retail stores. The coordinator informed the driver of his dispatches, either on the driver’s
arrival at the distribution center or on his return to the distribution center from the retail store.
The driver was usually expected to take a loaded truck trailer from the distribution center to
the retail store and return back with an empty trailer. He had to dispatch a loaded truck trailer
at the retail store and spend the night there. A driver had to bring the trailer at the dock of a
store only at its scheduled unloading time, no matter when he arrived at the store. The drivers
delivered the trailers in the afternoon and evening hours and they would be unloaded at the
store at nights. There was a gap of two hours between unloading of each trailer. For instance, if
a store received three trailers, the first one would be unloaded at midnight (12 AM), the second
one would be unloaded at 2 AM and the third one at 4 AM.

Although, the trailers were left unattended, they were secured by the drivers, until the store
personnel took charge of them at night. Wal-Mart received more trailers than they had docks,
due to their large volume of business. Wal-Mart maintained a strict vigil over its drivers by
keeping a record of their activities through the “Private Fleet Driver Handbook”. The purpose of
the book was to educate the drivers with regard to the code of conduct. It also included the
terms and conditions regarding the safe exchange of trailers with the store personnel and the
safety of Wal-Mart’s property. This book also contained a list of other activities, the non-
compliance of which would result in the termination of the driver.

To make its distribution process more efficient, Wal-Mart also made use of a logistics technique
known as ‘cross-docking.’ In this system, the finished goods were directly picked up from the
manufacturing plant of a supplier, sorted out and then directly supplied to the customers. The
system reduced the handling and storage of finished goods, virtually eliminating the role of the
distribution centers and stores. There were five types of cross-docking.

In cross docking, requisitions received for different goods from a store were converted into
purchase or procurement orders. These purchase orders were then forwarded to the
manufacturers who conveyed their ability or inability to supply the goods within a particular
period of time. In cases where the manufacturer agreed to supply the required goods within
the specified time, the goods were directly forwarded to a place called the staging area. The
goods were packed here according to the orders received from different stores and then
directly sent to the respective customers.

To gain maximum out of cross-docking, Wal-Mart had to make fundamental changes in its
approach to managerial control. Traditionally, decisions about merchandising, pricing and
promotions had been highly centralized and were generally taken at the corporate level. The
cross docking system, however, changed this practice. The system shifted the focus from
“supply chain” to the “demand chain,” which meant that instead of the retailer ‘pushing’
products into the system; customers could ‘pull’ products, when and where they needed. This
approach placed a premium on frequent, informal cooperation among stores, distribution
centers and suppliers with far less centralized control than earlier.
INVENTORY MANAGEMENT

Wal-Mart had developed an ability to cater to the individual needs of its stores. Stores could
choose from a number of delivery plans. For instance, there was an accelerated delivery system
by which stores located within a certain distance of a geographical center could receive
replenishment within a day. Wal-Mart invested heavily in IT and communications systems to
effectively track sales and merchandise inventories in stores across the country. With the rapid
expansion of Wal-Mart stores in the US, it was essential to have a good communication system.
Hence, Wal-Mart set up its own satellite communication system in 1983. Explaining the benefits
of the system Walton said, “I can walk in the satellite room, where our technicians sit in front of
the computer screens talking on the phone to any stores that might be having a problem with
the system, and just looking over their shoulders for a minute or two will tell me a lot about
how a particular day is going. On the screen, I can see the total of the day’s bank credit sales
adding up as they occur. If we have something really important or urgent to communicate to
the stores and distribution centers, I, or any other Wal-Mart executive can walk back to our TV
studio and get on that satellite transmission and get it right out there. I can also go every
Saturday morning around three, look over these printouts and know precisely what kind of
work we have had.”

Wal-Mart was able to reduce unproductive inventory by allowing stores to manage their own
stocks, reducing pack sizes across many product categories, and timely price markdowns.
Instead of cutting inventory across the board, Wal-Mart made full use of its IT capabilities to
make more inventories available in the case of items that customers wanted most, while
reducing the overall inventory levels. Wal-Mart also networked its suppliers through
computers. The company entered into collaboration with P&G for maintaining the inventory in
its stores and built an automated reordering system, which linked all computers between P&G
and its stores and other distribution centers. The computer system at Wal-Mart stores
identified an item which was low in stock and sent a signal to P&G. The system then sent a re-
supply order to the nearest P&G factory through a satellite communication system. P&G then
delivered the item either to the Wal-Mart distribution center or directly to the concerned
stores. This collaboration between Wal-Mart and P&G was a win-win proposition for both
because Wal-Mart could monitor its stock levels in the stores constantly and also identify the
items that were moving fast. P&G could also lower its costs and pass on some of the savings to
Wal-Mart due to better coordination.

Employees at the stores had the ‘Magic Wand,’ a hand-held computer which was linked to in-
store terminals through a radio frequency network. These helped them to keep track of the
inventory in stores, deliveries and backup merchandise in stock at the distribution centers. The
order management and store replenishment of goods were entirely executed with the help of
computers through the Point-of-Sales (POS) system. Through this system, it was possible to
monitor and track the sales and merchandise stock levels on the store shelves. Wal-Mart also
made use of the sophisticated algorithm system which enabled it to forecast the exact
quantities of each item to be delivered, based on the inventories in each store. Since the data
was accurate, even bulk items could be broken and supplied to the stores. Wal-Mart also used a
centralized inventory data system using which the personnel at the stores could find out the
level of inventories and the location of each product at any given time. It also showed whether
a product was being loaded in the distribution center or was in transit on a truck. Once the
goods were unloaded at the store, the store was furnished with full stocks of inventories of a
particular item and the inventory data system was immediately updated.

Wal-Mart also made use of bar coding and radio frequency technology to manage its
inventories. Using bar codes and fixed optical readers, the goods could be directed to the
appropriate dock, from where they were loaded on to the trucks for shipment. Bar coding
devices enabled efficient picking, receiving and proper inventory control of the appropriate
goods. It also enabled easy order packing and physical counting of the inventories.

In 1991, Wal-Mart had invested approximately $4 billion to build a retail link system. More than
10,000 Wal-Mart retail suppliers used the retail link system to monitor the sales of their goods
at stores and replenish inventories. The details of daily transactions, which approximately
amounted to more than 10 million per day, were processed through this integrated system and
were furnished to every Wal-Mart store by 4 a.m., the next day. In October 2001, Wal-Mart
tied-up with Atlas Commerce for upgrading the system through the Internet enabled
technologies.

Wal-Mart owned the largest and most sophisticated computer system in the private sector. The
company used Massively Parallel Processor (MPP) computer system to track the movement of
goods and stock levels. All information related to sales and inventories was passed on through
an advanced satellite communication system. To provide back-up in case of a major breakdown
or service interruption, the company had an extensive contingency plan.

By making effective use of computers in all its company’s operations, Wal-Mart was successful
in providing uninterrupted service to its customers, suppliers, stockholders and trading
partners.
Let’s look at example of sort of coordination and resource sharing at Wal-Mart

Wal-Mart as we know is King of supply chain management. As Friedman says, they manage
their supply chain “down to the last atom. For example, in 1980s—a decade before the
internet--Wal-Mart hooked up in store point-of-sale terminals with major suppliers in real time
using a custom built satellite network.

How it works:

• When a customer buys P&G diapers, a message is instantly sent to P&G

 So, this is information exchange

• Sort of nice. It might help P&G plan manufacturing. But is that worth a satellite network?

 Actually, yes, because the initiative goes way beyond information integration:
 Wal-Mart says to P&G, OK, you decide when to send more diapers to our stores based
on these real-time information flows

• A DECISION right (when to reorder) is being moved from Wal-Mart

• Why is this good?

  P&G has information Wal-Mart doesn’t’: general consumer demand about diapers,
future pricing policies, national promotions, new products, competitor actions

• See any problems?

 Yes, incentives: Why wouldn’t P&G intentionally overstock?

• Because Wal-Mart says, here’s another idea.

 We’ll pay you on when sale happens.

This is a big deal because it is more efficient and responsive, sure but it aligns incentives with
suppliers to get right amount to right stores and it pushes inventory risk onto them. This was
very advanced for its time technically. VSAT was new. It was a management innovation as much
as a technology innovation: Pioneered the idea of “vendor managed inventory”

THE BENEFITS REAPED

Wal-Mart strongly believed and constantly emphasized on strengthening its relationships with
its customers, suppliers and employees. The company was very vigilant and sensed the smallest
of changes in store layouts and merchandising techniques to improve performance and value
for customers. The company made efforts to capitalize on every cost saving opportunity. The
savings on cost were always passed on to the consumers, thereby adding value at every stage
and process.

Wal-Mart also enjoyed the benefits of low transportation costs since it had its own
transportation system which assisted Wal-Mart in delivering the goods to different stores
within (or sometimes less than) 48 hours. Transportation costs for Wal-Mart were estimated at
approximately 3% of the total costs as compared to 5% for their competitors. Having its own
transportation system enabled Wal-Mart to replenish the shelves four times faster than its
competitors.

Wal-Mart priced its goods economically and the prices varied from day to day. The company
enjoyed good bargaining power as it purchased huge quantities. This enabled it to price its
products competitively and pass on the benefits to the consumers. The company offered higher
discounts than any other retailer and they earned good revenues in the form of higher volumes.
Low pricing ensured that the sales volumes were high and consistent.

The benefits of an efficient supply chain management system included reduction in lead time
faster inventory turnover, accurate forecasting of inventory levels, increased warehouse space,
reduction in safety stock and better working capital utilization. It also helped reduce the
dependency on the distribution center management personnel resulting in minimization of
training costs and errors. The stock-out of goods and the subsequent loss arising out of it was
completely eliminated.
Wal-Mart’s supply chain management practices resulted in increased efficiency in operations
and better customer service. It eliminated old stocks and maintained quality of goods. Bar
coding and radio frequency technologies enabled accurate distribution of goods. Cross-docking
also helped Wal-Mart to reduce inventory storage costs. It also helped to cut down the labor
and other handling costs involved in the loading and unloading of goods.

Recent Steps by Wal-Mart:

Savings in Packaging:

Wal-Mart, America’s low-cost retailer since 1950, is now the largest company in the United
States. As such a highly visible giant, the bargain retailer for the masses has received severe
criticism for its social and environmental impact on society. In addition to the need to improve
its public image, Wal-Mart is facing serious strategy challenges in its bid to remain the nation’s
leading retailer: How to continue expansion and how to maintain profit margin—the balance of
cost to acquire inventory and fund overhead versus the most competitive selling price. In large
part, Wal-Mart’s success has been built on a steady-growth expansion plan that has taken it
nationwide and global; however, the domestic growth has nearly capped. To achieve continued
growth, Wal-Mart must diversify beyond its bargain retail agenda. In February 2005, Wal-Mart’s
CEO made a pledge to engage customers, suppliers, associates and communities in Wal-Mart’s
first major sustainability effort. What has been purported to have started as a marketing ploy
took hold, and Wal-Mart began seeing tangible cost savings with innovations in packaging that
saved significant money on cardboard—and thus, lowered overhead. To find more
opportunities to save money in packaging, Wal-Mart developed a packaging scorecard that
requires all suppliers to disclose detailed information about the packaging material used in
products that Wal-Mart sells. Use of the scorecard led to millions of dollars saved in the two
years since its development, and innovations began emerging in product engineering.

Wal-Mart Going Green:

The specifics of the new policies, requirements and deadlines for what Wal-Mart called its
"Global Responsible Sourcing Initiative" are very bold, and most were targeted at suppliers
based in China.

A new supplier agreement, for example, sets out the requirements:

 Manufacturers' facilities must certify compliance with laws and regulations where they
operate as well as rigorous social and environmental standards, set by government
agencies, beginning with suppliers in China in January 2009 and for all other Wal-Mart
suppliers by 2011.
 By 2012, suppliers must work with Wal-Mart to make a 20 percent improvement in the
energy efficiency inside the top 200 factories in China that Wal-Mart directly sources
from.
 Suppliers must create a plan to eliminate, by 2012, defective merchandise reaching the
Wal-Mart supply chain.
 All of Wal-Mart's direct import suppliers, plus all suppliers of private label and non-
branded products, must provide the name and location of every factory they use to
make the products that they sell to Wal-Mart.
 And by 2012, all suppliers Wal-Mart buys from directly must source 95 percent of their
production from factories that receive the highest ratings on environmental and social
practices.

In effect, Wal-Mart was telling its suppliers that to get its business, suppliers must make their
operations environmentally friendly and socially responsible, and ensure that their suppliers'
business practices and operations are greener than they ever have been.

The nagging question, however, is whether Wal-Mart and its supplier base can pull this off. Or,
will this become another RFID misadventure for its suppliers—too much money, too short a
deadline and too little ROI.

Wal-Mart's Green Strategy- Why Now?

In announcing the new green and product safety policies and requirements of its suppliers, the
world's largest retailer is aiming to do many things.

No doubt, a driving force behind a greener Wal-Mart—especially with the thousands of Chinese
suppliers it works with—is to improve Wal-Mart's battered corporate image in the United
States and abroad by holding suppliers to stricter manufacturing, product safety and
environmental requirements. CEO Scott receives much of the credit for taking this critical first
step.

Wal-Mart's new standards can also be classified as risk management. China, as a nation of
consumer-product goods (CPG) manufacturers, has become a supplier to the world. And Wal-
Mart tops the retailing list: 70 percent of commodities sold at Wal-Mart are made in China.
Furthermore, if Wal-Mart was its own economy, it alone would rank as China's eighth-biggest
trading partner, ahead of Russia and Canada.

But Chinese suppliers' reputation for manufacturing operations is anything but green and
product safety has been a serious issue, especially for the past couple of years.

At the Wal-Mart summit, Mike Duke, vice chairman for Wal-Mart's international division, noted
that confidence in Chinese products has been sagging after high levels of industrial toxins were
found last year in exports ranging from toothpaste to toys. Last year, for instance, Wal-Mart
pulled two brands of dog treats from its shelves after tests found that they contained traces of
the industrial chemical melamine. Melamine had been found in a Chinese-made pet food and
was blamed for the deaths of dozens of dogs and cats in North America in 2007.

"We are expecting more of ourselves at Wal-Mart," Duke told attendees, "and we will also
expect more of our suppliers."

Is Wal-Mart's Green Strategy a RFID Redux?

For all of the noble reasons Wal-Mart has offered for its new green supplier strategy, several
industry watchers question whether the retailer can actually meet those "aggressive goals," as
Wal-Mart called them, and deadlines for compliance.

The problem lies in the complexity and vastness of China's supplier networks. We're not talking
about one nice, clean supply chain, where [Wal-Mart] can go to their tier 1 or tier 2 suppliers
and be able to get this ability and eliminate some of the product quality, supplier and
environmental risks. We're talking about a maze of supply chains. And as one moves
downstream in each supplier's own supply chain, pushing far into operations of smaller
manufacturers in Vietnam and Thailand, the visibility into supply chain information becomes
narrower and narrower.

On the technology front, Wal-Mart is dealing with very small suppliers that typically won't have
the IT infrastructure that will allow them to give their customers—which are Wal-Mart's
suppliers-visibility into what they're doing. The amount of data and criteria that we need to
look at to make an educated decision on whether a supplier is abiding by whatever regulations
and guidelines we need them to abide by, in terms of green and environment—this is not a
manual exercise that anyone can go through. And if those small suppliers can't supply that data,
how can Wal-Mart know if its suppliers are truly compliant?

Wal-Mart, of course, has a long history of pushing forward with IT-based supply chain
initiatives. The most recent example has been the various mandates that its U.S. suppliers affix
radio-frequency identification (RFID) tags to goods moving throughout Wal-Mart's supply chain.
For all of the challenges Wal-Mart and its suppliers now face, however, the fact that Wal-Mart
is embarking on the strategy is a big step in the right direction that will force other large
companies to follow suit.

Just like with RFID, labeling, packaging: it's Wal-Mart starting these initiatives and putting a
stake and time line in the ground that will make the industry start to think about these things
more seriously.

Wal-Mart in Drivers Seat:

With its $408 billion in sales for the fiscal year ended Jan. 31, the retailer has plenty of clout to
persuade makers of goods sold in its big-box stores to create environmentally friendly
packaging and exclusive product sizes, and to participate in joint advertising promotions.

Now, Wal-Mart wants to be their chauffeur as well. The retailer aims to take over U.S.
transportation services from suppliers in an effort to reduce the cost of hauling goods. Wal-
Mart is contacting all manufacturers that provide products to its more than 4,000 U.S. stores
and Sam's Club membership warehouse clubs, says Kelly Abney, Wal-Mart's vice-president of
corporate transportation.

The goal: To handle suppliers' deliveries in instances where Wal-Mart can do the same job for
less, then use those savings to reduce prices in stores, Abney says. Wal-Mart believes it has the
scale to allow it to ship everything from dog food to lawn chairs more efficiently than the
companies that produce the goods. "It has allowed our suppliers to focus on what they do best,
manufacturing products for us," he says. "With lower costs usually come increased sales."

Manufacturers would compensate Wal-Mart by giving the retailer lower wholesale prices for
the goods it transports. Wal-Mart isn't saying how much it hopes to save. However, in a slim-
margin business such as retailing, even small efficiencies can help the bottom line; in 2009, Wal-
Mart trimmed expenses by almost $200 million by packing and scheduling its U.S. truck fleet
more efficiently, according to spokesman Lorenzo Lopez.

Until now, suppliers made most deliveries to Wal-Mart's distribution centers. The retailer then
used its fleet of 6,500 trucks and 55,000 trailers to ferry goods between the regional centers
and individual stores. Under the new program Wal-Mart will increase its use of contractors, as
well as its own vehicles, to pick up products directly from manufacturers' facilities.

That will allow Wal-Mart to carry more per truck and improve on-time delivery rates, says Leon
Nicholas, a director at consulting firm Kantar Retail. Wal-Mart also would have more sway in
negotiating fuel prices, thanks to its larger purchasing volume, he says.

The price cuts Wal-Mart is seeking are twice as much as the cost of transporting goods in some
cases, say officials from two suppliers. In two instances, Wal-Mart asked for a 6 percent
reduction in the price it pays for products based on its own cost calculation, while suppliers
estimated the actual expense was equal to about 3 percent, the people say.

"There may be a disconnect when we walk into the room on what that cost might be," Wal-
Mart's Abney says. "But we work collaboratively. As soon as a supplier shares the data, almost
always those differences are quickly resolved."

Abney says Wal-Mart has thousands of suppliers and he has taken part in talks with more than
100. Some manufacturers have already shifted their deliveries and associated costs to Wal-
Mart, he says.

One side effect of the Wal-Mart plan is that consumer-product manufacturers may face
increased transportation costs on deliveries to other retailers as they lose economies of scale
on their own delivery fleets, says Randy Huffman, a former Wal-Mart executive who now runs
GBD 360, a Bentonville (Ark.) consulting firm that works with suppliers.

"That aligns with Wal-Mart's taking cost out of the supply chain for their benefit and not their
competitors," he said. Suppliers are going to have to apply that increased freight cost
somewhere, so it's more than likely it will be passed onto other retailers.

Bentonville-based Wal-Mart is eager to reduce expenses after announcing on May 18 that sales
at its U.S. stores open at least a year fell for a fourth straight quarter. Mike Duke, who took over
as chief executive officer last year, pledged in October that costs would rise slower than sales.
Since then, Wal-Mart has sharpened its focus on transportation expenses, escalating talks to
take over trucking from suppliers this year, Abney says.

The retailer also has sought to offer goods like cereal and laundry detergent for less to lure
shoppers back to stores; lowering transport costs provides room to do that. The strategy is part
of what Wal-Mart calls its "productivity loop"—efficiency reflected in lower bills for shoppers at
the cash register.

As for suppliers, they may have to go along with the plan even if their other remaining
transport expenses rise because Wal-Mart is so big, says Vic Gallese, an independent retail
consultant based in Fort Worth. "The vendors might say, 'My other overhead costs will rise,'"
said Gallese, who has spent 25 years in the retailing industry. "And Wal-Mart will say, 'That's
your problem.'"

The bottom line: By attempting to take over the transportation from its suppliers, Wal-Mart
hopes to achieve efficiencies to cut its own prices.
Wal-Mart in India:

In India, government does not allow any multinationals to operate in retailing so no foreign
investment is allowed in retailing, other than in wholesaling, and 51% in single brand retail,
which, of course, is not its business model. That's why Wal-Mart does not have any retailing in
India.

What they have in India is a wholesale cash-and-carry business, which is only permitted for
business members. They are also a franchise store to a retailing company, which is Bharti Retail,
who are their joint venture partners, who will run and own stores, but Wal-Mart provides them
with merchandise and management expertise to do so.

How Business-to-Business Model works in India:

India is a nation of retailers. India has 12 million kirana (grocery) stores, which, in a per capita,
given even the population of India, is the highest in the world. We have a lot of small, mom-
and-pop stores in India, catering to all kinds of consumers.

These kirana stores traditionally buy from wholesale markets, and some of them are also
serviced directly by manufacturers. In fact, India has one of the most evolved distribution
systems by big companies. Companies like Unilever, for instance, and ITC have probably one of
the most evolved distribution systems in India. They service just close to a million of those 12
million kirana stores, directly, which basically means that 90% of these stores actually have to
go to wholesale markets to buy products.

There is a very evolved wholesale network in India for products, from which these kirana stores
get serviced. It is a low-cost operation, but it is also very inefficient. Especially when you move
to produce areas, fresh merchandise, fruits and vegetables, meats, and so on and so forth, it is
very unevolved and it is very archaic in many ways.

How this model works is, essentially, that you have a selling point, where you directly source
products from manufacturers, and then sell those products to kirana stores at great prices, all
under one roof.

Wal-Mart in India, are working with suppliers on packaging. They are working with suppliers on
stock control. They are working with suppliers on better management and inventory, and so on.
All those savings which come out of that effective management of supply chain will be passed
on to the kirana stores, who will be their customers in this case.

Challenges in India:

The biggest challenge is that there is no organized supply chain in India. Wal-Mart has even
been surprised by some of the leading manufacturers in India like Unilever, Procter & Gamble,
and some other big names, who are actually welcoming the arrival of organized supply chains in
India and Wal-Mart pioneering that effort.

Because of the lack of that supply chain today, there is no forecasting, there is no
understanding of how demand is. It's largely a push based system. So, I think, getting that
transparency across the supply chain will be very unique.

The other thing is, there is no refrigerated cold chain for fresh produce in India, so therefore a
lot gets wasted. By McKinsey's own work, which the consulting firm has done, almost 40% of
fresh produce in India gets wasted from farmland to the time it reaches the consumer.

And thirdly, because there is no transparency of consumption, the farmer and the small
manufacturer actually ends up selling to the middle men who actually may or may not be so
transparent about pricing.

Summary:

Walmart has always been at the forefront when it comes to using technology in managing its
supply chain. This is what makes it so efficient and hence low cost. Wal mart’s initiatives like
vendor managed inventory were very innovative for the time that they were introduced in.

Recently walmart has been trying to expand in developing markets like india where it faces
many challenges. Considering this it has even changed its business model in india.

Similarly it is growing very conscious of its image among customers. It has taken several
initiatives of late to make sure that suppliers in china adhere to quality standards as well as
ethical standards.

It is also planning to handle the transportation on its own to achieve more efficiencies and cut
costs.